Question

What is the percentage return (interest rate) an investor will receive if they purchase a zero-coupon bond today for $954.70 that will mature in one year and pay $1,000 at maturity?

Answer 1

Interest rate = 4.75% (approx)

Step-by-step explanation:

Given:

Face value of bond = $1,000

Present value of bond = $954.70

Interest rate = ?

Computation of Interest rate :

`Interest rate = [(Face value of bond)/(Present value of bond)-1] * 100\\`

`Interest rate = [(1,000)/(954.70)-1] * 100\\\\Interest rate = [1.04744946-1] * 100\\Interest rate = [0.04744946] * 100\\= 4.744946`

Interest rate = 4.744946%

Interest rate = 4.75% (approx)